STUDENT/TEAM

Gross Margin Analysis

To: Marketing Assistant Trainees

From: Porter Gamble, Vice President of Marketing
RE: Understanding Our Distribution Channels

From your training so far, you should understand why consumers in a target market buy over-
the-counter cold remedies. You should also understand that consumers have a number of
competitive products from which to choose. In this assignment you will learn about how our
products reach consumers, who the players are in this process, and how the price consumers pay
for the product is determined.

A distribution channel is a series of firms that facilitates the movement of products from the
manufacturer to the customer. It can include a number of intermediaries that help manufacturers
like Allstar get their products to market. Wholesaler intermediaries are firms that handle the flow
of products from the manufacturer to the retailer. Retail intermediaries are the final stop in the
distribution channel and sell our product, Allround, to the end customer. A direct channel
distributes our products to customers through retailers that purchase directly from Allstar
Brands. Indirect channels distribute our products through retailers that purchase our products
from wholesaling intermediaries, who have purchased from Allstar Brands.

Channel intermediaries provide very important services to Allstar Brands. These services include
breaking bulk, creating assortments, selling activities, stocking inventory, and customer service.
These services are valuable to Allstar Brands, and we compensate the channel intermediaries by
sharing our gross profit margin with them. Gross Profit Margin (or Margin) is the difference
between Allround’s selling price and the variable cost of making the product. To understand this
process, it is necessary to learn a number of new terms:

MSRP Manufacturer’s Suggested Retail Price. This is the price that

Allstar tells consumers our product is worth.

VOLUME DISCOUNT The price discount we give to a channel intermediary for

buying our product and reselling it to customers.
MANUFACTURER'S SELLING
PRICE (MSP) The MSRP minus the Volume Discount.
PROMOTIONAL An additional discount to the channel to compensate
ALLOWANCE intermediaries for extra promotional activities.

PRICE TO CHANNEL The Manufacturer’s Selling Price minus the Promotional

Allowance.

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STUDENT/TEAM

To better understand the distribution channel and gross profit margins, complete the following
tables.

Stage 1: Calculating pricing and margin data. You may have noticed that Allround does not sell
for MSRP in the marketplace. The table below calculates the discounted selling price of Allround
to distributors.

To start this assignment, use the Pricing report to identify the MSRP of Allround and record this
amount in the table.

Next, record the volume discount from the Pricing report.

Calculate the Manufacturer’s Selling Price (MSP) using the following formula:

MSP = MSRP - (MSRP * Volume Discount)

Now, record the Promotional Allowance from the Pricing report in the table.

Calculate the Price to Channel using the following formula:

Price to Channel = MSP - (MSP * Promotional Allowance)

Example: An MP3 player has an MSRP of $100 and a volume discount of 40%. In addition, the
manufacturer provides a 10% promotional allowance. What is the Price to Channel?
MSP = 100 – (100 * 0.40) = 60
Price to Channel = 60 – (60 * 0.10) = 54

Price Discount Calculations for Allround

MSRP $

LESS Volume Discount @ _______% $

Manufacturer's Selling Price (MSP) $

LESS Promotional Allowance @ _______% $

Price to Channel $

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STUDENT/TEAM

Stage 2: Channel Pricing Analysis: Now we use this data to complete the channel pricing table
and the pricing report below.

Allstar Brands
* You will find Per Unit
MSRP Cost on the Product
MSP decision from the
previous period, or you
Price to Channel can calculate it from
COGS (Income
Per Unit Cost*
Statement) and Total
$ Margin Unit Sales (Sales Report)
in the current period.
% Margin ($ Margin / MSP)

Drug Stores Groceries Mass Merchandisers

Actual Actual Actual
Retail Price Retail Price Retail Price

Per Unit Cost to Per Unit Cost Per Unit Cost to

Channel+ to Channel+ Channel+

$ Margin $ Margin $ Margin

% Margin % Margin % Margin

+ Per Unit cost to Channel is the same as

Manufacturer Price to Channel.